What's going on with the peso?

The fix rate surpassed $14 on December 2 for the first time in thirty months. On Monday, December 8, the cost of a dollar had jumped to $14.40. That same day, the Exchange Commission announced it is reviving the auction mechanism it devised in October 2008 as a “preventative measure”. If the exchange rate moves more than 1.5% in the course of a single trading day, Banco de México (Banxico) will sell up to US$200 million dollars into the exchange markets. Today, the 9^th, the fix rate retreated three centavos, the first drop in the cost of a dollar since mid-November.

A couple of hundred million dollars isn’t enough money to stop a run on the peso. In the past, though, it’s proven to be enough to prevent a panic from spreading. When trading volumes are low, a few transactions can send the exchange rate soaring. The idea behind the auctioning of options to buy dollars is simple: since a large, abrupt jump in the cost of a dollar can cause investors to sell pesos first and ask questions later, make some more dollars available to give investors time to see if the problem is more than one of thin markets.

The fundamental question is why the peso has been steadily weakening since May. The strength of the dollar is an explanation that highlights the fact that developments outside of Mexico are behind the weakening of the peso and that the peso isn’t alone: the currencies of other emerging markets have weakened along with the Euro. That’s not the only story, though.

Portfolio investment flows are another face of the same coin. Those depend on the attractiveness of peso-denominated investments compared to investments in other currencies and the fluctuations in investors’ appetite for risk and search for returns.  The magnitude of portfolio investment flows can swing wildly from quarter to quarter. This year provides a good example. In the first nine months of 2014, portfolio investment totaled US$19.9 billion. Of that, US$4.9 billion entered in Q1 and US$13.4 billion, in Q2. Inflows in Q3 plunged to US$1.7 billion, their lowest level since the financial crisis with the exception of the “taper tantrum” in Q2 2013 sparked by the announcement that, at some point, the Fed would begin to dial down asset purchases.

Will the peso strengthen or will it continue to depreciate? In 2011 and 2012 – not so very long ago – we saw steeper jumps in the cost of a dollar, ones followed by a recovery of the peso. In July 2011, the cost of a dollar averaged $11.67. Five months later, a dollar cost, on average, $13.76. Two months after that, in February 2012, the cost of a dollar averaged $12.78, only to bounce back to $13.92 in September. Over the course of fourteen months, the fix exchange rate traded in a $2.25 range (monthly averages), ending the period $1.27 higher than it began. By those standards, the peso’s variations over the last fourteen months have been relatively mild. In October 2013, the fix rate averaged $13.26. Assuming, for a moment, that the rates we’ve seen in the first six trading days of December hold for the rest of the month, the range will be less than a peso.

Don’t expect the peso to appreciate much before Christmas: between holiday travel plans and normal quarter and year-end business transactions, there’s typically a seasonal increase in the demand for dollars. We don’t expect investors to redeploy money to emerging markets towards the end of the year, as they often do once they’ve locked in their annual bonuses.

The peso could well appreciate at the very end of the year. Then again, it might not. Relative returns, confidence, oil prices, and perceptions of the strength of the world economy will all play a role in determining capital flows. But, foreign investment flows don’t depend on just exogenous events. The reforms approved during this Administration piqued interest in Mexico’s future. While investors in money market obligations may focus most on how returns today compare to returns in other countries, equity investors will be very interested in how the reforms passed during this Administration are implemented.

Oil...

When Hacienda sent the Administration’s budget proposal to Congress on September 5, US$82 for a barrel of Mexican export crude seemed extremely conservative. Five weeks later, it doesn’t look quite so unlikely: on October 16, Mexican export crude sold for US$76.70. The “puts” Hacienda purchases each year to protect the budget from a sharp drop in oil prices may be in the money in 2015. (With an exercise price of US$80, the puts are well worth their US$450 million estimated cost.) 

Lower oil prices mean larger trade and current account deficits. A larger current account deficit requires larger capital inflows to finance it – at a time when capital flows to emerging markets are declining. Bad luck for Mexico...

Ouch: the peso returns to beginning of year highs...

The fix rate peso jumped to $13.49 today, matching its January 24 high for the year. The  monthly fix rate averaged $13.23 with just a day left in September, in line with its first quarter average. Just two months ago, in July, the fix rate averaged $12.98. What's going on?

The explanation undoubtedly lies in portfolio investment flows and the impact of a stronger dollar on the attractiveness of carry trade investments. The carry trade entails borrowing in a strong currency (like the dollar) and investing the proceeds of the loan in bonds in a weaker currency (like the peso) that pay a higher interest rate than that charged on the dollar loan. So long as the dollar doesn't strengthen (or, the flip side, the peso doesn't weaken), investors reap the yield differential. If the dollar weakens (or the peso strengthens), the currency losses can swamp the gains from the interest rate differential.

The size of the carry trade in emerging markets isn't really known. However, one estimate puts it at a very hefty US$2 trillion. The Bank for International Settlements indicates that foreign ownership of emerging markets' debt rose from 8% in 2007 to 17% in 2012.

Mexico was an early beneficiary of carry trade inflows. The relative size and depth of its bond markets mean that peso-denominated bonds remain an important destination for foreign investors. In Mexico, along with Poland, Hungary and Indonesia, foreign investors hold 35% or more of government bonds.

The strength of the dollar translates into weaker currencies around the world, including the peso. Today's Financial Times presents three reasons why the dollar will remain strong: the recovery of the US economy, the end of QE, and the ECB's adherence to a more dovish monetary policy. (See the complete article at http://www.ft.com/intl/cms/s/0/27a516d8-47e4-11e4-be7b-00144feab7de.html#axzz3EjWzUWOC)

Unless peso interest rates rise or the peso strengthens, portfolio investment is not likely to flow into Mexico in the massive quantities we saw in 2011 and 2012.

Mexico exports terrorists?

There are people in the US who believe that ISIS (or ISIL, aka Islamic State) terrorists are about to or have infiltrated the US from Mexico, amongst them Texas Governor Rick Perry. The Department of Homeland Security isn't amongst them.

For the story, see http://www.nytimes.com/2014/09/16/us/us-pushes-back-against-warnings-that-isis-plans-to-enter-from-mexico.html?emc=edit_tnt_20140915&nlid=20064986&tntemail0=y&_r=0

All in favor of borrowing abroad...

Mexico’s net foreign debt rose US$22.3 billion in the first half of 2014. The 56.3% increase over the same period of 2013 was thanks to the enormous jump in net indebtedness that occurred in the second quarter. In the second quarter of this year, Mexico borrowed abroad (net) US$20.5 billion, a sharp contrast to the (net) repayment of US$4.5 billion in the second quarter of 2013.

Public sector borrowing drove the jump in foreign debt. The net public sector foreign debt crept up US$0.1 billion in the first half of 2013. In the first half of 2014, it soared US$12.6 billion. Borrowing by the non-banking public sector drove the jump. Development banks’ net borrowing was imperceptible. Public sector companies took on US$12.5 billion in the first six months of 2014; in the first six months of 2013, their net borrowing inched up US$0.7 billion.

The private sector continued to borrow abroad in the first six months of this year but at a slower pace: the US$9.8 billion net increase was 31.0% less than in the first half of 2013. Companies and banks’ net foreign debt in the first half of 2014 rose, respectively, by US$5.6 billion (30.0% more than in the first six months of 2013) and US$4.2 billion (57.6% less). 

Some foreign investors returned to Mexico in the second quarter...

Foreign direct investment (FDI) in the first half of this year totaled US$9.7 billion, slightly more than half the amount of portfolio investment and just a third of its level in the first six months of 2013. Europe supplanted the US as the principal sources of FDI in the first half of this year, with 26.1% of the total coming from Spain, 20.1% from the Netherlands, and 13.0% from Belgium. Only a tenth came from the US while Japan, Canada, and Germany were the sources, respectively, of 7.2%, 4.9% and 3.9% of the total. Most of FDI (71.8%) in the first six months of 2014 went into manufacturing. Financial services attracted a fifth of the total and the remaining 7.9%, into all other sectors. 

FDI totaled US$20.2 billion in the second quarter of last year; in this year's second quarter, FDI was just US$2.3 billion. Obviously the AB INBev/Modelo transaction swelled last year’s number. However, a very unusual occurrence also affected FDI in this year’s second quarter: new investments were negative. Reinvested profits totaled US$4.0 billion in Q2 2014 while net liabilities with parent companies rose US$1.4 billion, offsetting the US$3.2 billion reduction in new investments. (There is an outflow of the same amount registered in the current account for reinvested profits. Neither new investments nor changes in inter-company liabilities have a current account counterpart.)

Portfolio investment in the first half of this year was US$18.2 billion, nearly three times its level in the first half of 2013 when the “taper tantrum” hit portfolio investment in emerging markets in the second quarter. The big change was in foreign investment in equities, which constituted a whopping 35.9% of portfolio investment in the first half of the year. The US$6.6 billion of foreign investment in equities really occurred in the second quarter; only US$0.3 billion flowed in during the first. It’s a sea change from the first half of last year, when foreigners cut their investments in Mexican equities by US$4.9 billion. Foreign investment in money market instruments was US$11.7 billion, 5.5% above its level in the first half of 2013. 

Whew! An inflow into high yield bond funds

Reports say investors put US$0.68 billion into high yield bond funds in the week ending August 13. That's a welcome relief after the US$7.1 billion outflow of the prior week.

Meanwhile, though, other worrying trends in the financial markets have Fed officials and bankers on edge. Liquidity is not as abundant in the "repo" market as it was. "Repos" are repurchase agreements in which borrowers sell government bonds (principally) for cash to a third party at the same time they promise to repurchase the bonds at a slightly higher rate in the future.

That some banks are reported to be reducing their role as middlemen in the repo market is important because financial institutions like banks and hedge funds use repos for funding. Repo markets froze up in the 2008 crisis, threatening the international financial system.

No one is suggesting that repo markets are on the verge of a 2008-style seizure. However, two Fed regional presidents  expressed their concern about repo markets this week. 

Investors pulling out of junk bonds...

In the week ended August 6, investors yanked a record US$7.1 billion out of junk bond funds, the Wall Street Journal reports. The prior record of US$4.6 billion was set in June 2013. The week ending August 6 was the fourth straight week in which investors cut their holdings in junk bond funds and a marked contrast to steady inflows early in the second quarter.

At the same time, yields on US treasuries have been declining.

The funds flows out of junk bonds are another reason to believe that portfolio investment flows are behind the recent depreciation of the peso.

Why has the peso jumped? There's Argentina...

On August 1, the International Swaps and Derivative Association (ISDA) “resolved that a failure to pay credit event occurred in respect of the Argentine Republic”. What does that mean? It means that any institution holding a credit default swap (CDS) insuring against a default by Argentina can collect. 

CDS are written by private parties. Banks and insurance companies (remember AIG?) developed a lucrative fee-generating business line by writing CDS. The notional value of the CDS written can -- and often does -- far exceed the nominal value of the debt being covered by the CDS. Estimates of the value of the CDS written on the defaulted bond issue are not widely known, if they are known with any exactitude.

By triggering the right to collect, the ISDA resolution opens up a can of worms. Over the coming days, we'll see how much exposure to the Argentine default there really is in the international financial system and which financial institutions are most heavily exposed. The issue isn't really who holds the actual bonds. It's which institutions bet that Argentina wouldn't default and they value of the CDS they wrote  based on that belief. 

The background:

Argentina entered into a technical default when it failed to make a debt payment to foreign creditors on June 30. The technical default became a real one a month later. It’s not that the country didn’t have the money to make the payment or even that it didn’t want to pay. The funds are sitting in a US bank awaiting transfer.

The situation is the consequence of a June 16 US Supreme Court’ decision that it would not accept an appeal of lower court rulings requiring Argentina to pay bondholders who refused to participate when the country restructured its debt earlier this decade as well as the holders of the restructured bonds. The US Supreme Court ruling also upholds lower court decisions that permit bondholders to issue subpoenas to banks to trace assets held abroad by Argentina.

The rulings are a major victory for those “vulture investors” who often bought the bonds at discounted rates in the secondary market and turned to the courts to enforce their right to payment in full. Be that as it may, the rulings will greatly complicate any future debt restructurings since the rewards for holding out have just soared.

Why has the cost of a dollar jumped?

The answer may well have to do with the hefty US$4.8 billion loss Portugal's largest bank (in terms of assets), Banco de Espirito Santo, reported on July 30. Losses could be even higher, up to US$5.7 billion. The US$4.8 billion loss was 72% higher than had been expected earlier in the month when Portugal's central bank -- based on information provided by KPMG, the Espirito Santos's group's auditors -- stated on July 11 that Banco de Espirito Santo had enough capital to weather possible losses.

The central bank not only ordered the bank to raise more capital, it also forced the suspension of voting rights of three Board members of the Espirito Santo family and ordered the  bank's auditors replaced. Last week, the family patriarch, Ricardo Espirito Santo, was arrested in connection with an investigation of money laundering and tax evasion. An outsider replaced him as head of the bank.

The damage had already been done, though. Extensive lending to prop up weak companies in the family empire took its toll when those family companies failed anyway. Three family holding companies have filed for bankruptcy protection this month.

What does this have to do with Mexico? Portfolio flows... If the effective failure of Portugal's largest bank were to cause investors to become more concerned about risk, they will pull back from investments in emerging markets. Economex does not think it's a coincidence that the fix rate peso jumped from $13.06 on July 29 to $13.23 on the 31st.

And then, of course, Argentina's default doesn't help.

A poor year for US growth...

The IMF has again reduced its expectations for growth in the US. Now, the Fund is projecting a 1.7% growth rate for 2014. That's bad news for Mexico, for whom exports to the US are so important to its own growth.

It's not all bad news, though: the damage was done in the first quarter, when GDP contracted 2.9%. The rest of the year should be quite decent: the IMF expects the US economy to grow 3% - 3.5% in what remains of 2014.

The IMF has reservations about US growth over the longer-term, putting the growth rate at 2%, tops, unless there are major reforms, "including tax and immigration changes, more investment in infrastructure and job training, and the provision of childcare assistance, which could help lure more Americans into the workforce" (July 23 New York Times). The Fund even went so far as to argue there is a "strong case" for more government spending to support the recovery, provided there's a plan to tackle entitlement spending later.

The need for structural reforms to boost the economy's sustainable long-term growth rate isn't confined to Mexico.

Bubbles? Not the preserve of monetary policy says the Fed...

Federal Reserve (Fed) Chairperson Yellen reiterated her view on expansive fiscal policies and asset bubbles in a speech at the International Monetary Fund on July 2. Dr. Yellen accepts that maintaining financial stability is a primary responsibility of the Fed but argued that is best done through macro-prudential regulation. Acknowledging the challenges to regulating successfully that the substantial shadow banking sector poses, she made it clear, however, that she hasn’t eliminated monetary policy as a tool to rein in financial excesses.

Not all policymakers are as sanguine that low interest rates and expansive monetary policy don’t pose a threat to financial stability. Perhaps the perception of a threat depends on whether the size of the economy relative to the size of capital flows… As RaboBank put it, although the “approach is arguably an improvement on the Greenspan/Bernanke-era “Let Them Eat Bubbles” policy stance, it still does not seem to address the issue that in today’s global, interconnected markets central banks will presumably have to be regulating left, right, and centre to try to prevent bubbles from forming somewhere”. 

A sobering analysis by the world's central bankers...

The Bank For International Settlements (BIS) is the central bankers' bank. Its Annual Report is an ideal forum in which central bankers can voice concerns they aren't able to express as openly as individuals. The BIS's just published 2014 Annual Report makes for sobering reading. Here are some of the major concerns...

--New asset bubbles are forming -- and the global economy hasn't even fully recovered from the excesses of the financial crisis! With interest rates at record lows, investors aren't paying much attention to risk. Consequently, weak borrowers are able to issue debt at surprisingly low rates, given their underlying fundamentals.
   Does this remind you of the heady days before the PIIGS crisis? The head of the BIS's monetary and economic department said "There is a disappointing element of deja vu in all this... The signs of financial imbalances are there." According to the Annual Report, debt levels in many emerging markets and in Switzerland "are well above the threshold that indicates potential trouble."

--It could be a few more years before the the world recovers from the financial crisis. Europe could experience an especially slow recovery because of high debt levels: "During the boom, resources were misallocated on a huge scale and it will take time to move them to new and more productive uses", according to the text of a speech by the General Manager of the BIS, Jaime Caruana, a former Governor of Spain's central bank. 

--Governments need to take measures to improve their economies, including improving labor mobility. The governments of countries that are growing rapidly need to watch out for overheating.

--There were admonitions for the private sector as well. Banks should raise more capital, both as a cushion against risk and to deal more quickly with portfolio problems. That corporates haven't taken advantage of the boom in stock prices to increase investment is one reason productivity gains have slowed in most developed economies: "Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions." 

The BIS sends this message: "...a growth model that relies too much on debt, both private and public, ... over time sows the seeds of its own demise."

Fine tuning US GDP: ouch...

The US releases three estimates of each quarter's GDP. The first is a preliminary estimate; the second and third fine tune it. The latest estimate of the US growth rate in the first quarter was the largest quarterly revision from the second estimate since 1976! 

It now seems the US economy didn't contract 1.0% in the first quarter. It fell 2.9%. Although the number refers to what happened three months ago and signs of recovery are abundant, a contraction that large still has shock value. 

What changed? Personal consumption was much weaker than had been thought: instead of a 3.1% growth rate, personal consumption grew just 1.0%. The fall in exports was larger than in earlier estimates as was the rise in imports, meaning that net exports subtracted more from GDP than we'd thought. The drag from inventories was also larger than estimated earlier. What little good news there was came from the fact that the contractions in business investment and residential investment were smaller than we'd thought. 

How do Mexicans rate public services?

The results of INEGI's second annual survey of Mexicans' perceptions of the quality of government services makes for fascinating reading. (The link is below.) The maps illustrating the differences in perceptions by state are very interesting.

http://www.inegi.org.mx/inegi/contenidos/espanol/prensa/Boletines/Boletin/Comunicados/Especiales/2014/junio/comunica3.pdf

Who's borrowing abroad?

The public sector's net foreign borrowing was much higher in the first quarter of this year than in the first quarter of 2013. Development banks started borrowing instead of repaying debt: in the first three months of this year, development banks took on US$0.3 billion net; a year earlier, they repaid US$0.7 billion. Public sector companies borrowed US$7.5 billion net,  nearly quadrupling their borrowing compared to a year earlier. 

Private firms were also borrowing in foreign currencies. Borrowing by private sector companies (excluding banks) in the first quarter of 2014 was more than six times higher than a year earlier. The percentage increase did benefit from being measured against a low base. Still, net borrowing came to a not insignificant US$2.3 billion.

Foreign investment isn't what it was...

Had foreign investment in Mexico in the first quarter of this year matched that of the first quarter of last year, this year’s first quarter capital account surplus would have exceeded last year’s. It didn't, so foreign investment was just three-fifths of its level a year earlier. Both components of foreign investment -- foreign direct investment (FDI) and portfolio investment (PI) -- were lower.

FDI was US$5.8 billion, 28.4% less than a year earlier. Three-fifths of FDI took the form of reinvested profits; that US$3.5 billion has as its counterpart an outflow of the same size in the current account. The remaining two-fifths of FDI – new investments and net liabilities with parent companies – does not have a mirror counterpart in the current account. New investments accounted for US$1.8 billion (31.4% of total FDI) and increased liabilities (net) with parent companies, US$0.5 billion (8.0% of the total). 

Portfolio investment was half its level of the first quarter of 2013. Foreign investment in equities was more than ten times its first quarter 2013 level. Such impressive growth is much easier to register when measuring against such a low base. And, alas, foreign investment in equities was just 5.9% of PI. Foreign investment in money market instruments -- 94.1% of PI -- was US$4.5 billion, half its level of a year earlier. It was also less than FDI in the quarter. 

Mexico vs. China...

Here's the link to an interesting article from the New York Times on why some companies are choosing to invest in Mexico instead of China.

http://www.nytimes.com/2014/06/01/world/americas/as-ties-with-china-unravel-us-companies-head-to-mexico.html?emc=edit_tnt_20140531&nlid=20064986&tntemail0=y&_r=0

The "80-20" rule strikes again...

Did you know that manufacturing companies employing more than 500 people -- 17% of all manufacturing firms -- exported 82% of all manufactured exports in the 2009-2012 period? Ten firms were responsible for 24% of manufactured exports; 50 firms exported 41% of the total.

2.7%, not 3.9%...

Hacienda has slashed its 2014 growth projection from 3.9% to 2.7%. Using publication of the first quarter growth figures, Hacienda finally recognized publicly what businesspeople have been saying since January: there's no way the Mexican economy will grow 3.9% this year.

Besides the weather-induced weak growth in the US, Hacienda acknowledged that the fiscal reform hit consumption in the first quarter. The adjective "hard" wasn't used, but there was no need to: the growth rate speaks for itself. Arguing that the "adjustment" to the higher prices resulting from the tax package is pretty much accomplished, Hacienda says that consumption had already begun to pick up in April. The magnitude of the impact of the fiscal reform on consumption can be appreciated by the fact that, according to Hacienda, public sector spending on subsidies, which includes programs directed to the most vulnerable segments of the population, was 30.8% higher in real (discounting inflation) terms in the first quarter of this year than in the first quarter of 2013.

As for public sector investment, Hacienda underlined the 46.5% real increase in the public sector's "physical investment" in the first quarter (oh, the wonders of a low base for comparison) and vowed to "redouble its efforts to assure efficiency, agility and transparency in the execution of public sector spending". That's good news, especially since companies don't report that they've seen seen a burst of public investment.

And, as a reminder of the importance of the energy reform, Hacienda also blamed the 1.1% drop in oil production (a 1.3% contraction in the petroleum sector's GDP) for the weak first quarter. 

AT&T to part company with Carlos Slim...

AT&T's announcement that it plans to acquire DirecTV has implications for Mexico. According to the May 19 New York Times, AT&T is planning to sell the roughly 8% it owns of America Movil in order to forestall regulators' concerns about the impact of the merger in Latin America. 

A must read...

Alfredo Corchados' Midnight in Mexico: A Reporter's Journey Through A Country's Descent Into Darkness should be on the reading list of anyone interested in Mexico. Well-written and illuminating... Now out in paperbackk from penguin Books.

A stronger peso...

The average monthly fix rate peso fell below $13.00 for the first time since last August with today's setting. Granted, May's $12.99 average is based on only five working days and there are 16 left to go in the month.

Still, it seems that the peso is recovering nicely from the aversion to emerging market currencies induced by the Fed's tapering announcement. The average monthly fix rate has appreciated since February. The spread between the minimum and maximum fix rate during the month has fallen dramatically. And, this month's maximum fix rate is the lowest it's been since May 2013, when then Fed Chairman Bernanke announced that, one day, the Fed would begin to reduce its monthly asset purchases.  

The education census...

The census mandated by the educational reform passed early on in the sexenio has been completed, more or less. It’s the first count of how many schools there are in the country and how many people are employed as teachers. It’s more or less because in one out of every eleven schools, the national statistical institute, INEGI, wasn’t allowed in to do its work. The percentage was highest in some of México’s poorest states, ones in which the more radical teachers’ union, the CNTE, reigns: in Chiapas, 41% couldn’t be surveyed; in Oaxaca, 27.4% and in Michoacán, 27.3%.

The census findings are dismal. One out of nine public schools doesn’t have electricity. (So much for the digital classroom…) Three out of ten don’t have running water. Nearly half aren’t connected to sewers. One out of eight doesn’t have a bathroom. Nearly three-quarters don’t have a telephone landline.

Not everyone who is paid by a school works in one. Of that group of 298,174 people, nearly two-fifths have retired, receive pensions, have quit or died but are still paid as active workers. Nearly as many are supposedly working in another school. Another 13.1% are aviadores, the colloquial term for people who are paid for jobs they’ve never done or that don’t exist. Only a tenth work for the union or have other responsibilities. The president of Mexicanos Primeros, a highly regarded NGO (non-governmental organization) dedicated to educational issues, estimates the annual cost of the missing workers (nearly twice the number of workers employed by Pemex) at $35.8 billion.

The census isn’t the only issue. The Administration has brought suit in the Supreme Court against the states of Oaxaca, Chiapas, Michoacán, Zacatecas, Sonora and Baja California for failing to obey the law.

The profile of a Mexican-born immigrant to the US...

Here are some of the more interesting findings pertaining to Mexican-born immigrants contained in the newly released Pew Hispanic Center study. The study is at: http://www.pewhispanic.org/2014/04/29/hispanic-nativity-shift/

Between 2000 and 2012, the foreign-born population in the US grew 30.9%. The Mexican-born population grew less rapidly (25.4%), reducing the Mexican-born share of the foreign-born population from 29.4% to 28.2% of the total.

Over a third (34.3%) of the 11.5 million Hispanics living in the US who were born in Mexico arrived in the US before 1990. Another 31.1% came to the US between 1990 and 1999. Not quite a quarter (23.1%) arrived between 2000 and 2005. Only 11.5% have come since 2006.

In households in which languages other than English are spoken at home, nearly 3/4 (72%) of Mexican-born immigrants to the US who are 18 or older said they spoke English "less than very well". The opposite was true for Mexican-born immigrants under 18: 69% spoke English very well.

The educational profile of people born in Mexico living in the US is very different from that of other ethnic groups. Only 17.8% of those 25 years of age or older had completed more than high school. Only the Central American-born population had similarly low levels of educational attainment. The high school drop out rate of Mexican-born foreigners living in the US fell from 42.3% in 2000 to 13.3% in 2012 but, along with Central Americans, remained the highest of any foreign-born group. College enrollment rose from 7.4% in 2000 to 18.0% in 2012; once again, the Mexican-born foreign population rated lowest on the measure.

Income levels reflected the lack of educational achievements: median personal earnings for Mexican-born foreigners in 2012 were US$20,000 while median household income was $35,000, the lowest of any group. Nearly 3/5 (57.0%) of Mexican-born foreigners were in the first and second quintiles of the income distribution. Only 20.7% were in the top two quintiles (the fourth and fifth). Nearly three of every ten (27.8%) of Mexican born foreigners living in the US in 2012 were living in poverty.

What's caused Mexican stock prices to pick up?

Here's a very interesting graph from CNNMoney, courtesy of EPFR Global. For the first week this year, the end of the first quarter saw investors put money into emerging market stock funds. Do you think it's coincidental that Mexico's stock index, the IPC, picked up 1.8% in dollars between March 28 and April 4 (+1.4% in pesos)? In that same week, the Dow rose 0.6%, the S&P 500, 0.4%, and the Nasdaq fell 0.7%. That the IPC outperformed the US indices has been a very rare occurrence this year.

Source: http://money.cnn.com/2014/04/14/investing/emerging-markets/index.html?iid=HP_LN

Security in Mexico...

INEGI's third security survey doesn't make for happy reading. Judging by its results, Mexicans don't feel very safe. Here are some of the salient findings:

--Nearly 3 of every 4 Mexicans surveyed (72.4%) feel that it's not safe to live in their city.
--Almost 2/3 of people surveyed (64.9%) think the security situation will be equally bad or worse a year from now.
--Two out of every three people surveyed have seen or heard or a robbery in their neighborhood in the last three months.
--Vandalism is a fact of life: 56.5% of respondents reported seeing or hearing of acts of vandalism in their homes or businesses in the last three months.
--Two-fifths of respondents saw or heard of the sale or use of drugs in their neighborhood in the last three months.
--Gangs are another unpleasant reality for many Mexicans: a third of respondents reported seeing or hearing about gangs in their neighborhood in the last three months.
--A quarter reported gunshots in their neighborhoods in the last three months.
--People have changed their habits: 65% said they've changed their habits in terms of carrying valuable objects. Strolling around their home after 8:00 PM is something that half of respondents have re-thought. Nearly half (47.6%) have re-thought letting their underage children go outside to play.
--Seven out of ten people surveyed don't think much of the efficacy of state and local police: 28.1% said the police were not effective (28.1%) while 42.1% thought they were a "little bit effective".

Unemployment in the US...

The US unemployment rate is down to 6.7%. That's the good news. The bad news is that the unemployment rate in the US would be 12.2% if the labor force participation rate were kept steady at 66%. No wonder Fed Chair Yellen is going to such lengths to emphasize that investors shouldn't expect the Fed to start increasing the Fed Funds rate when the unemployment rate hits 6.5%.

Trade with Mexico's Asian TPP partners...

In 1993, 1.7% of Mexico's exports went to its Asian TPP partners. In 2013, 1.1% of Mexican exports went to those countries. In 1993, 78% of Mexico's exports to its Asian TPP partners went to Japan; in 2013, that percentage was 53%.

In 1993, 7.1% of Mexico's imports came from its Asian TPP partners. In 2013, their share was 6.9%. In 1993, 84% of Mexico's imports from its Asian TPP partners came from Japan; in 2013, it was 65%.

There's lots of room for trade to grow. 

Mexico's Asian TPP partners...

Between 1999 and 2013, just 2.7% of foreign direct investment (FDI) in Mexico came from Japan, Malaysia, Brunei, Singapore, Vietnam, Australia and New Zealand -- the Asian TPP cohort. More than four-fifths (82%) of that 2.7% came from Japan and over half of the Japanese FDI was made in 2012 and 2013.

Mexico's record 2013 capital account surplus: good news and bad news...

Mexico's 2013 capital account surplus of US$58.6 billion was the largest in the country's history. That's good news. So is the fact that portfolio investment played a less significant part in it and that foreign direct investment (FDI) posted an historical high.

There's bad news too. Mexico’s net foreign debt climbed; Mexican deposits in foreign bank accounts soared; and the proportion of the capital account surplus going into reserves declined while that required to finance the current account deficit rose.

Let’s look at the good news. In each of the last four years (2010 – 2013), Mexico’s capital account surplus has posted a new historical high. Between 2010 and 2012, portfolio investment drove the surplus: in 2010 and 2011, portfolio investment equaled half of the capital account surplus; in 2012, portfolio investment exceeded the capital account surplus. In 2013, the 62.9% fall in portfolio investment inflows (to US$$21.0 billion) and the doubling of FDI (to US$35.2 billion) reduced portfolio investment’s contribution to the capital account surplus to 35.9%.

The surge in FDI was thanks to AB InBev’s purchase of the 50% of Grupo Modelo shares it didn’t yet own. New investments constituted half of last year’s FDI. Increases in subsidiaries’ debt with their parent companies accounted for a fifth of FDI in 2013. Reinvested profits, which appear as an outflow in the current account, accounted for 29.4%. 

Now for the bad news... First, there's how the capital account surplus was distributed between reserves and financing the current account deficit. Last year, reserves rose US$13.0 billion, their smallest increase since 2009 and an increase that was US$8.0 billion smaller than in 2012. Financing the US$22.3 billion current account deficit, the largest since 1994, required US$7.6 billion more than in 2012.

The near tripling of Mexico’s net debt with the exterior is another piece of unwelcome news. Mexico’s net foreign debt increased US$41.9 billion last year, second only to 2010’s US$45.4 billion increase. To put the figures in perspective, the increase in 1995 when the US Treasury arranged the famous loan to Mexico, net foreign debt rose US$26.5 billion.

Mexico's net foreign debt soared last year, just as in 2010, because of jump in private sector borrowing. Private commercial banks took on an additional US$15.1 billion of net debt in 2013. In 2012, they repaid US$3.2 billion. In 2010, they borrowed US$29.3 billion. The net debt of private sector firms increased US$18.1 billion last year, more than double 2012’s increase, which was an historical high. In 2010, the non-banking private sector borrowed US$8.4 billion. In 1995, the private sector –- banks and non-banks – repaid US$1.3 billion.

In contrast, the public sector (development banks plus the non-banking public sector) took on just US$8.6 billion in net debt in 2013, 1.8% less than in 2012. In 1995, the public sector took on US$14.5 billion in net debt and the Banco de México, another US$13.3 billion.

Another piece of bad news is the jump in assets held abroad, which rose US$39.5 billion in 2013, 15.9% more than in 2012. There were significant changes in their composition: Mexican FDI plunged while Mexican deposits in foreign bank accounts climbed.

Last year, Mexican FDI totaled US$10.0 billion, a bit more than half of its 2012 level. While well below its 2010-2012 annual average of US$17.0 billion, it was still above its US$6.3 billion annual average in 2005-2009. 

The big movements in the assets held abroad account came from the growth of Mexican deposits in foreign bank accounts. Those deposits soared US$27.4 billion last year, an historical record. In 2012, they rose US$3.1 billion. The tremendous jump in deposits in foreign bank account may well be explained, in part, by the sale of Grupo Modelo: Mexican shareholders may have chosen to place the proceeds of the sale in foreign bank accounts.

The valuation adjustment to reserves bears mention because of its size. Until 2013, the largest valuation adjustment to reserves ever made was in 2011. It reduced the value of reserves by US$441 million. In 2013, the valuation adjustment added US$4.6 billion to reserves. 

Why Mexico's current account deficit is climbing...

In Mexico, the trade account deficit typically drives the growth of the current account deficit. That has not been the case for the last three years, years in which the current account deficit grew significantly.  Climbing factor services payments (principally interest payments and remitted or reinvested profits) explain the jump in the current account deficit. 

In 2013, the deficit in the factor services account was US$41.4 billion, 35.0% higher than in 2012. Between 2008 and 2010, outflows for factor service payments averaged US$15.8 billion annually. Between 2011 and 2013, the annual average jumped to US$24.8 billion. 

The upward trajectory of the current account deficit over the last three years serves as a reminder of how easily a jump in factor service payments, helped along by a reduction in oil export revenues and remittances, can transform a minimal current account deficit into a not so minimal one. 

While we expect Mexico’s current account deficit to rise from 1.8% of GDP last year to 2.2% this year and 2.5% next, foreign direct investment (FDI) should come close to covering the entire current account deficit – provided that the reforms passed last year are implemented in the ways we hope. Both this year and next, the projected deficit remains below the 3% of GDP that is the upper limit of what is considered to be a safe level for developing countries.

Government to taxpayers: don't pay me yet

Whether you call this year's tax package a fiscal reform or not, everyone can agree that there are a multitude of changes to take into account when calculating taxes due this year. January and the first part of February have been a nightmare for taxpayers scrambling to figure out how much they owe under the new fiscal provisions. That wasn't a surprise.

It was a surprise, though, when Hacienda told individual taxpayers that they should wait an extra month, until March, to pay their January taxes and then pay them along with their February tax payments. It's not out of concern for taxpayers that Hacienda isn't collecting January's taxes this month: Hacienda's platforms simply weren't up to the job.

Meanwhile, negotiations continue as to whether everything that, as of January 1, is no longer deductible will stay that way. The private sector is holding on to the hope that some benefits might be more deductible than others.

Security: the most important obstacle to Mexico's growth

According to the Banco de Mexico's January survey of private sector economists, security problems are the single most important limitation to Mexico's growth in the next six months.

Yes, but...

Each month,  the survey asks participating economists (of which I am one) to choose three factors from a list of 23 that will be the principal limitations on growth in the next six months. "Problemas de inseguridad publica" is always included on the list. It's not surprising that it headed the list in the January survey, given the Government's frontal attack on the security problems in Michoacan. Like everyone else, economists can be influenced by what's in the news. That the Government has chosen to address the challenges to state authority raised by druglords' control of parts of the state and the rise of the auto-defenses is a major policy decision.

All through 2013 (and before), problems of public security have been on the radar screen as limitations to growth. Over the last year, security has typically been in 3rd or 4th place. Until January, "weakness of the world economy" and of "weakness in foreign markets" have been considered the most important limits to growth. They have often been followed by "international financial instability". Security "beat out" those first two standards by 2 and 1 percentage points, respectively, in January. That's hardly a resounding lead. 

There's nothing new in the fact that economists from the private sector see security problems as a limitation to growth. That's been the case for some time, per the Banxico surveys. However, be careful about citing it as the most important limitation to growth on the basis of a single month's survey and the fact that it received 20% of responses instead of 19% or 18%.

Will Banco de Mexico raise the Reference Rate?

Between the unexpectedly high inflation rate in the first half of January and the market turmoil, the odds that Banco de Mexico will wait until 2015 to raise the Reference Rate are falling. The inflation rate alone would not cause Banxico to raise the Reference Rate since there’s hope that price increases will have been frontloaded more than had been anticipated. However, the contagion effect from the “Fragile Five” complicates the situation.

To combat the flight from their currencies, the Five have raised interest rates. Turkey has been the most aggressive, boosting its benchmark rate from 4.50% to 10.00% on January 28; the overnight lending rate the climbed from 7.75% to 12.00%. India’s central bank raised the country’s key interest rate from 7.75% to 8.00% the same day and also announced that it will adopt a monetary policy to target inflation (an objective of 6% by 2016) whether the government is in agreement or not. The South African and Brazilian central banks both raised interest rates half a percentage point in January. On the 15^th, Brazil set the rate at 10.50%. On the 29^th, South Africa’s rate moved up to 5.5%. Indonesia is the outlier. Although the central bank hasn’t raised rates this month, it did surprise the markets in November when it raised the rate from 7.25% to 7.50%.

In their January 29 monetary policy announcement, Banco de Mexico’s Board of Governors defied the trend in which emerging markets’ central banks have raised key interest rates. The Board left the Reference Rate at 3.50%, where it has been since October 25, 2013. However, the Governors cautioned that the balance of risks has deteriorated and are watching for signs that inflationary expectations are rising or that the depreciation we’ve seen is feeding through to inflation. If that happens, the only surprise would be if if they don't raise the Reference Rate this year.